The term ‘state remedies/bankruptcy system’ will be used in this article to refer to the system provided by law to compel the payment of debt and to protect debtors from the collection efforts of their creditors. The division between these two purposes is reflected in the institutions which comprise the state remedies/bankruptcy system. Generally speaking, it is the state courts acting under state law such as that providing for attachment, garnishment, execution, or discovery in aid of these proceedings, that enforce the creditor's right to payment. The federal bankruptcy courts, on the other hand, seem primarily to provide protection to debtors through proceedings that protect the debtor's property from seizure by the state courts, extend the time for payment of debt, or discharge the debtor from liability for his debts. These institutions are subsystems of the state remedies/bankruptcy system, and as such will be referred to as the ‘state remedies subsystem’ and the ‘bankruptcy subsystem.’ Part I of this article examines the functions, both legal and economic, that are performed by the state remedies/bankruptcy system. It also examines how these functions are performed in each of the two subsystems in cases that are dealt with entirely within the subsystem in which they originate. Part II considers the relationship between the two subsystems, focusing on the procedural dynamics that attract cases to each. Part II reaches the conclusion that the procedurally induced displacement of the process of business failure from the bankruptcy subsystem distorts that process in a manner that is economically undesirable. Part III presents a proposal for a simple amendment to the Bankruptcy Code, the adoption of which would restore the process of business failure to the bankruptcy subsystem. Part IV describes the procedural dynamics of the current state remedies/bankruptcy system, and the manner in which the proposed reform would affect those dynamics.
Lynn M. LoPucki, General Theory of the Dynamics of the State Remedies/Bankruptcy System, 1982 Wis. L. Rev. 311